Subprime Learning: Positive and Negative Lessons of the Japanese Bubble for Americans

Extract

What Japan can teach Americans and the world about financial crises is a question that has been cropping up for some time. References to Japan in fact appear to be increasing, with a recent turn to worries of “becoming Japanese” through a decade or so lost to malaise and marginal growth, perhaps interspersed with bouts of financial panic. Heralding this Japanization is America's seeming onset of deflation and a liquidity trap in tandem with a virtually zero interest rate policy. These developments have largely eroded American policy options on the financial side. In Japan, this impotent, “pushing on a string” stage of the post-bubble shakeout left the state sector largely moribund, especially after it vainly tried to spend its way out of the crisis. It remains to be seen whether the US, under Obama, will pursue an effective fiscal policy or repeat this year's tax rebates, the equivalent of simply throwing money in a hole. This commentary reviews the highlights of our current crisis as well as what we can learn from Japan and whether we are, in fact, learning from Japan.